Legal Q&A: Employee fraud

It’s likely that employee fraud will increase during a downturn. With the UK economy heading for a recession, employers should ensure they have procedures in place to handle fraud should it arise.

Q If an employee is suspected of fraud what initial steps should be taken?

A The first priority for the organisation should be to secure its assets and prevent any further losses. This may include suspending signing authorities or bank mandates. It will usually involve suspending the alleged wrongdoers while an investigation takes place. It is equally important to secure any evidence there may be.

Steps should be taken to suspend any routine destruction of documents and to retrieve and secure electronic data. In serious cases, forensic computer experts may be called in to ensure that electronic data is secured or retrieved safely. It may also be necessary to make insurance notifications and, where appropriate, to notify regulators or make a market announcement.

Q Should the employee always be suspended?

A If there are reasonable grounds to suspect that fraud has taken place then suspension will usually be the most appropriate course of action, subject to a contractual term permitting suspension. If there is a risk that the wrongdoing will continue if the suspect has access to computers or other records that may be altered or destroyed then suspension will be essential.

The employer will need to consider whether the investigation can realistically continue with the wrongdoer in the office. If the organisation fails to suspend an individual, it may be difficult to later argue that the employee’s conduct was sufficiently serious to justify a dismissal for gross misconduct.

If the organisation is regulated by the Financial Services Authority (FSA) and there is concern that the individual is not behaving in a fit and proper manner then there will be an expectation from the FSA that the employee be suspended.

Q When should the police be brought in?

A An employer is under a duty to involve the police where there is a suspicion that money laundering has taken place. Otherwise, the employer has discretion over whether to report the crime. There may however be insurance or regulatory obligations that require any wrongdoing be reported.

The advantage of reporting the matter to the police is that the force has greater powers to interview witnesses and seize evidence. Police action can also be more cost effective than applying to the civil courts for injunctions. Before the police can act, the crime must be reported to a local police station to obtain a crime reference number. Many forces have specialist fraud squads that can then investigate the matter further.

Getting the police involved sends a strong message to other potential wrongdoers. However this will mean that the organisation may lose control over the investigation process and may increase the chance of publicity. It may also cause delay to any civil proceedings to recover any lost assets.

Q Should such employees be paid to go away?

A If the statutory dismissal and disciplinary procedure is complied with and if there is strong evidence the employee has committed fraud, then the employer can be confident that any dismissal will be upheld as fair. Thus there is no need to simply pay the employee to go away.

Q What rights does a suspended employee have?

A The employment contract should always be checked to determine exactly what rights an employee suspended for fraud will have. However, while they are suspended they usually enjoy their normal contractual rights, eg, to be paid, and will have all the statutory employment rights that any other employee enjoys.

Q What should be done, legally to minimise the risk of fraud?

A Employers should ensure that all employment contracts and the staff handbook contains appropriate restrictions so as to minimise the potential for employees to carry out fraud. For example, ensuring that employees take at least one 10-day holiday a year can be a useful way to detect fraud. A fraudster might be able to cover up their activities for short absences but a longer absence is more likely to reveal what they have been doing.

Employers should ensure proper procedures are in place so as to minimise the risk of fraud and employees are given appropriate training on these procedures. Employees should be encouraged to report any colleagues who are committing fraud.

Q Can an employer tell a suspected employee to clear their desk and leave immediately?

A An employer can usually suspend an employee they suspect of having committed a serious breach of their contract and can require them to leave the building immediately. However, to dismiss them it will be necessary to apply the statutory dismissal procedure so as to avoid any claim for automatic unfair dismissal.

Stephen Ross, solicitor, Withers

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